Electronic Payment Instruments and Endogenous Money Supply

This paper analyzes the relationship between the endogeneity of money supply and the application of electronic payment instruments, including electronic money and virtual money. The paper describes these new payment instruments’ impact against money supply, and argues it is the endogeneity that leads to the dilemmas of China's monetary policy. Using Granger Causality Test with macroeconomic data from December 1999 to November 2007, the paper finds that the change in economic output may lead to corresponding changes in money supply, and the expansion of money supply may lead to the increase of money base. This phenomenon means that the central bank can not dominate the money supply practically, thus slack policy on the application of electronic money and virtual money should be put in force if it does not harm the nation’s financial security.